INFORMATION HIGHWAY FRIDAY

1 Month Left to Sell Before Possible Tax Hike

Some home sellers would need a sale contract inked before the end of 2017 in order to avoid a big tax bill that would be imposed if the GOP tax reform proposals become law. Both the House and Senate bills would require sellers to have lived in their residence for a longer period of time before qualifying for the capital gains tax exclusion on the sale of a primary home. They would have to live in their house at least five years out of the last eight; right now, the requirement is two years out of the last five.

The Senate version, however, includes an exception for transactions in which a contract is written before Jan. 1, even if the closing occurs in 2018. The bill passed by the House includes no such exception. Therefore, homeowners who are currently thinking about selling have only one month left to complete a deal before proposed tax changes would take effect. Should tax reform be enacted, some homeowners who sell in 2018 may no longer qualify for the capital gains exclusion, which covers up to $250,000 for an individual and $500,000 for a married couple. As a result, the difference between your client’s tax bill pre- and post-tax reform could be huge.
It won’t be known whether the House or Senate version of tax reform is adopted until the bill is finalized, which could happen in a few weeks. But sellers who haven’t lived in their house for more than five of the last eight years will want to act quickly regardless of the version that is approved.

Capital gains exemption
Under current tax framework, a typical owner, who has lived in their house for at least 2 years out of the last 5 years, will pay nothing in capital gains taxes if he sells his house. Under the proposed tax frameworks, owners need to live in their house for at least 5 years out of the 8 years in order to claim the exemption. Otherwise, they need to pay $3,480. In capital gains taxes.
In 2016, 14.1% of the owners in Minnesota lived in their homes for 2-4 years. These owners will not be able anymore to take the exemption based on the proposed tax frameworks.

Impact on housing prices
If both mortgage interest and real estate taxes deductions will be eliminated, home prices expect to fall from 7% to 10%. A decline in value as projected could mean a loss in home value of $10,370 – $15,550. for a typical homeowner.